The Intended and Unintended Consequences of Regulating for-Profit Colleges: A Model of College Choice and Retention

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This dissertation investigates individuals' college choice and dropout behavior in the market for vocational training, specifically in response to a recently proposed financial aid regulation. Vocational training is an important component of the postsecondary education arena and has been promoted by political leaders as an option for high school graduates who do not wish to attend traditional 4 year colleges. The major players in this market are for-profit colleges and community colleges, both of which offer open admission and mainly confer certificates and associate degrees. This paper evaluates the implications of a regulation proposed by the Obama administration to restrict federal student financial aid to for-profit colleges. Specifically, I examine the effect of this policy change on students' college enrollment and college retention. To that end, I develop and estimate a two-period discrete choice model of differentiated products, where the products are vocational colleges. In the first period, forward-looking and risk-neutral individuals choose a vocational college to attend or the outside option of no college. In the second period, those who are enrolled in a college decide whether or not to drop out of school upon learning more about their postgraduation outcomes. I estimate this model using Generalized Methods of Moments with school-level data collected from the Department of Education. Model estimates reveal heterogeneous preference across demographic groups and several differentiating factors between for-profit colleges and community colleges. I find that for-profit college enrollment is highly responsive to federal student financial aid availability and that most of those who attend for-profit colleges would rather forgo college altogether than substitute to community colleges. Counterfactual simulations reveal that the proposed regulation would be successful at steering students away from for-profit colleges, as intended by policy makers, but an unintended consequence of the regulation is that 77% of those who would have otherwise gone to for-profit colleges would rather choose the no college option than the community college option. This would amount to a net decline of 15% in college enrollment in the market for vocational training. Furthermore, I find that for those who would substitute from for-profit colleges to community colleges in response to the proposed regulation, their dropout probabilities on average would increase by 24 percent points due to mismatch.

Hanming Fang
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